Highlights
Cash Reserve Ratio which banks have to keep with RBI.
It is a fixed proportion of the total amount deposited in the bank.
At present, RBI has kept the CRR at 4.5 per cent.
New Delhi. The Reserve Bank of India increases the repo rate to reduce the flow of money in the market. Due to this, it is expensive for banks to take money from RBI and the interest on loans received by the common people from banks also increases. As a result, people take less money from the bank and the cash flow gets reduced. Apart from this, RBI also tries to stop the flow of cash by another trick. This is called the Cash Reserve Ratio (CRR).
It is worth noting that its purpose is not, however, directly balancing cash flows. But its effect appears to be there. If we understand the cash reserve ratio in simple words, then a fixed part of the amount deposited with the bank is deposited with the RBI. The main objective of this is to keep some part of the depositors’ money absolutely safe. However, RBI also uses it to balance the cash flow in the market. Let us know how this happens.
Impact of CRR on Economy
At present, RBI has kept the CRR for banks at 4.50 percent. It was increased by 50 basis points only on 4 May 2022. Now if you deposit Rs 100 in the bank, out of that Rs 4.5 goes to RBI. The more the RBI increases the CRR, the loanable amount with the banks goes on decreasing. This increases the interest rates on loans and reduces the amount of money in the hands of the people. One effect of this is that the purchasing power of the people decreases and there is some control on inflation. But in such a situation, there is also a negative effect on the economy when the demand decreases.
When does RBI change CRR?
When inflation falls outside the RBI’s target range (2-6 per cent), it can increase the CRR to reduce the cash flow in the market. It is worth noting that the CPI-based retail inflation rate has remained above 6 percent for the last several months. As a result of this, RBI has increased the CRR along with the repo rate.
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Tags: bank interest rate, bank loan, business news, Business news in hindi, inflation, RBI
FIRST PUBLISHED : July 31, 2022, 10:01 IST
